This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the bottom of any article.

January 29, 2013

Cerulli Delivers Tough Message for IBDs on Recruitment, Market Share

Independent broker-dealers are losing out to dually registered reps, RIAs

The independent broker-dealer community received a stark and sobering message on Tuesday about the overall health of the industry.

A presentation by Cerulli Associates’ Tyler Cloherty and Patrick Newcomb at the FSI One Voice Conference in San Diego focused on trends impacting the IBD space, specifically recruitment and market share, both of which IBDs are losing.

“From a general market stance, we are seeing IBDs lose headcount and market share to dually registered reps and RIAs,” said Cloherty, Cerulli’s associate director.

Surprisingly, IBDs are the net winners in recruiting, he added, but it’s something of a pyrrhic victory, as they are getting lower-end advisors.

“It doesn’t make sense for fee advisors to continue to pay a percentage to a broker-dealer, so they leave. IBDs are left serving small market reps, typically fall in the $10 million to $75 million range, with the majority at the lower end of that range.”

Dually registered reps do in fact stay with the IBD for their commission-based business, but that only accounts for about 30% of the assets. More and more assets, Cloherty said, are going to their own RIA.

“The question becomes, ‘What do IBDs have to provide in order to keep higher-end reps there?’” he noted. “Smaller IBDs who don’t have the resources for high-end offerings—those with typically 50 to 250 reps—are getting crushed. What they’re doing is loosening their compliance standards and offering products that larger firms might not offer, which isn’t good in-and-of itself.”

LPL Financial, Raymond James and AIG Advisor Group, larger broker-dealers organized in networks, have the base of scale and can make the necessary investments in packaged platforms to keep advisors at their firms, Cloherty said.

“It’s tough to make that investment into technology and oversight,” added Newcomb, a senior analyst with the firm, noting it’s the reason so many small IBDs are outsourcing to third-party vendors like Envestnet and Lockwood.

“For simplicity’s sake, you’re seeing a lot of broker-dealers trying to deliver a UMA environment, but it’s tough to get advisors to make the move because packaged models start to look like they’re the firm’s client, rather than the advisor’s client,” he said.

In order to satisfy this issue, broker-dealers will have to implement more “rep-driven programs.”

Both Cloherty and Newcomb were quick to add it’s not all bad news for independent broker-dealers, and concluded with a few positive takeaways:

There is a bit of an opportunity to recapture assets from RIAs that are under $100 million in AUM and subject to state regulation.

Larger firms are also creating commission-based platforms that keep the rep registered with the IBD, but they can also hang their own hat.

Generalist firms will no longer get it done. Advisors must specialize or they will die by 1,000 paper cuts.

From a recruiting standpoint, there are still a lot of advisors to be cherry-picked from wirehouses. However, the key is to focus on retention rather than strictly recruitment.

“It’s not enough to get them to leave the wirehouses, they have to want to stay with you,” Newcomb said.